- The Washington Times - Tuesday, June 6, 2000

The lowest-paid Americans for the first time last year were more likely to be audited by the Internal Revenue Service than wealthier taxpayers.

Single taxpayers and "working poor" families earning $25,000 or less were 18 percent more likely in fiscal 1999 to get a letter from the IRS demanding delinquent tax payments than the wealthiest taxpayer group that earns $100,000 or more, said a study last month by Syracuse University. The study is based on IRS information.

The audit rates for individual taxpayers generally were low, however, hovering around 1 percent, compared with nearly 50 percent for corporations with assets over $250 million, the study found.

The recent weighting toward low-income taxpayers appears to stem from tax changes enacted by the Republican-controlled Congress, which has cut IRS funding for traditional face-to-face audits that nab upper-income tax cheats, the university researchers said.

While showing greater leniency toward the affluent, who pay the most income taxes, Congress in its drive to reform welfare directed the IRS to crack down on low-income earners who fraudulently claim the earned-income tax credit, an income supplement program for the working poor.

Low-income cheats generally are getting caught through computerized audits, which trigger letters to taxpayers when errors or omissions are found. In those cases, taxpayers must meet face to face with an auditor only if a round of correspondence fails to resolve the problem.

The IRS and some members of Congress have called the study "misleading" because the letters can be less severe than personal encounters with IRS agents and because the IRS includes people who don't file their taxes in the low-income category because they have reported "zero" income.

The IRS says the computer-generated audits are more frequent, but less costly to carry out, permitting the agency to focus most of its time and money on the intensive in-person audits of higher-income taxpayers.

Taxpayers who have received "one of those letters" nevertheless feel the sting of the IRS, said Pete Sepp, spokesman for the National Taxpayers Union.

"When you see an IRS letter in your mailbox, you start shaking in your boots," he said, noting that he got a letter once demanding $8,000 in taxes, penalties and interest when the IRS mistakenly concluded that his wife had not paid income taxes one year. A written response providing documentation of her tax payments cleared up the matter, he said.

Computer "red-flagging" by the IRS has "increased tremendously," he said, and may be the way most people encounter the tax man now.

Mr. Sepp added that he expects auditing of high-income groups to pick up after the IRS stops diverting resources into an agency restructuring ordered by Congress.

Most analysts say the IRS' crackdown on low-income fraud was long overdue, but the result is bewildering to many taxpayers.

"For the past 12 months, I have been fighting with the IRS to prove that my son lives with me," said "Janice P.," a single mother who asked to remain anonymous but who recently related on an Internet discussion board how the IRS has repeatedly rejected her claim to the earned-income credit.

The IRS typically rejects a claim if it determines that another taxpayer already has made a claim using the same child's Social Security number. In this case, the boy's biological father for five years claimed the credit, even though the mother contends he should not get it because he rarely sees the boy and does not support him.

"Janice" hired an accountant and provided the IRS with ample documentation that shows she supports the child, she said, to no avail. The dispute has thrown her finances into disarray. Earned-income checks, which range from hundreds to thousands of dollars, often constitute a significant part of a poor taxpayer's income.

Tax preparers who help low-income earners with their returns say Janice's problem is common.

"Nowadays, we have so many single-parent homes and absentee parents trying to claim dependents on their tax forms. It becomes very confusing," said Isaac McRae, a tax preparer with many low-income clients in the District of Columbia.

Parents not only are fighting over who gets to claim the earned income credit. A host of other tax breaks also hinge on who can claim the children as dependents including a child credit, child care credit, adoption credit and various educational tax incentives.

Sometimes, the wrong parent files first. IRS cross-checking of Social Security numbers and other information through computer matches triggers an audit of the second parent's return, he said.

The strict rules designed to sift out cheaters, when combined with the difficulty of documenting custody and other child-related expenses, have added layers of complexity to the returns of taxpayers of even modest means. That complexity in itself leads to a high rate of errors in the tax returns which also trigger audits.

"It's a tremendous burden," said Mr. McRae, noting that women on welfare who have just gotten jobs must tally up the value of their subsidized housing, food stamps and other welfare benefits as part of a complicated calculation to determine whether they qualify for various credits.

"A lot of people are not good at math and following instructions," and simply get it wrong, or have an ill-informed friend or relative prepare the return, he said. The next thing they know, they get a letter from the IRS rejecting their claim.

"That's their worst nightmare," he said. "People are petrified when they get a letter" and often cannot afford professional help.

As part of its crackdown on low-income fraud, the IRS requires professional tax preparers to ask 18 questions to determine whether clients are eligible for the earned-income credit.

"I really did not enjoy the tax season this year. I had so much hostility in my office" as parents fought over who gets to claim the children, said Sue Miniter, a tax preparer in New York.

"Ten years ago if you had a child, that brought down your taxable income by $1,000. Now it reduces taxes by $2,500 or more. All of a sudden, a child has good dollar value," she said. "It's like gold fever. People get animalistic."

Mrs. Miniter said the IRS should focus on low-income tax cheats, because they are more numerous now than high-income evaders. Low-income workers like waitresses and day laborers often get paid with cash and can more easily hide their incomes from the IRS.

The salaries of affluent taxpayers are reported to the IRS on W-2 forms, and their investment income is reported on 1099 forms. The strict reporting requirements, enacted in the 1980s, have reduced tax cheating by the well-to-do and audits are not needed as often, she said.

Mark Luscombe, a tax lawyer with Commerce Clearinghouse Inc. in Riverwoods, Ill., blamed Congress for the increased complexity of the tax laws.

"They're basically forcing people to use a preparer. To save $100, you have to spend $100. We should have a simpler filing system for low-income people," he said.

Many tax professionals say the IRS' new emphasis on providing information and services to taxpayers has enabled the agency to collect more taxes without using heavy-handed auditing tactics.

But Mr. Luscombe said he is worried that the decline in face-to-face audits will encourage wealthier taxpayers to cheat more.

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